Investing can be a challenging task for many people, especially those who are new to the game. With so many investment options available, it can be so overwhelming to decide where to invest your money. However, Lars Kroijer’s theory on investing offers an elegant, simple yet effective approach to investing in passive global equities.
Who is Lars Kroijer?
Lars Kroijer is a former hedge fund manager, an author, and a regular contributor to publications such as The Financial Times, CFA Institute and The Economist. Kroijer’s investment philosophy is based on the idea that most people should invest in low-cost index funds, specifically a single global equity index fund, rather than trying to beat the market through active management or speculation.
Lars Kroijer’s Books
Lars Kroijer has written two books that provide further insights into his investment philosophy and approach. Here is a brief overview of each book:
Lars Kroijer’s two books, “Money Mavericks” and “Investing Demystified”, offer valuable insights into his investment philosophy and approach. Both books emphasize the importance of global diversification, low fees, and passive investing, and provide practical advice on how to construct a low-cost, simple portfolio using just two funds. By following Kroijer’s advice, investors can achieve their investment goals with confidence and ease, while minimizing risk and fees.
1. “Money Mavericks: Confessions of a Hedge Fund Manager”
Published in 2010, “Money Mavericks” provides an insider’s perspective on the hedge fund industry and the investment strategies used by top hedge fund managers. Kroijer draws on his experience as a hedge fund manager to provide readers with a behind-the-scenes look at the industry and the strategies that have made some of the world’s most successful hedge fund managers wealthy.
The book also provides insights into Kroijer’s investment philosophy, which emphasizes the importance of diversification, low fees, and passive investing. He argues that most investors would be better off investing in low-cost passive index fund rather than trying to beat the market through active stock picking or active hedge funds.
This is indeed a very open confession coming from a hedge fund manager.
2. “Investing Demystified: How to Invest Without Speculation and Sleepless Nights”
Published in 2013, “Investing Demystified” is a more detailed guide to Kroijer’s investment philosophy and approach. The book provides a step-by-step guide to investing in low-cost index funds and ETFs, with an emphasis on minimizing risk and fees.
Kroijer argues that most investors would be better off investing in a single diversified low-cost global index fund rather than trying to beat the market through active stock picking or market timing. He also emphasizes the importance of setting realistic investment goals and sticking to a disciplined investment strategy.
My favourite part of he book is where Kroijer calculates that, over a working life time, the average UK worker would save the equivalent value of 7 new Porsche cars by using a low-fee passive global index fund compared to the fees of an actively managed hedge fund.
The book includes detailed discussions of asset allocation, risk management, and portfolio construction, as well as tips on how to choose the right index funds and ETFs for your portfolio.
In short, Kroijer maintains using only two funds
1. A passive low-fee Global Equities fund or ETF
2. Cash or government bonds.
These two funds would be held in mostly the global equities with enough cash or government bonds for safety.
Kroijer’s Theory on Investing in Passive Global Equities
Kroijer’s theory on investing in passive global equities can be summarized in three key points:
1. Active management rarely beats the market
Kroijer believes that active management (remember he used to be a hedge fund manager), which involves trying to pick individual stocks or time the market, rarely beats the market in the long run. This is because active management comes with higher fees and expenses, which eat away at potential returns. Additionally, it’s difficult to consistently outperform the market through active management because it requires constantly staying ahead of other investors.
2. Diversification is key
Kroijer emphasizes the importance of diversification in investing. By investing in a wide range of assets, specifically global equities, investors can spread their risk and reduce the impact of any one asset on their overall portfolio. Global equities is the ultimate diversification in Kroijer’s opinion. He claims elsewhere to invest using this exact method himself.
Global diversification can help protect against market and geographical volatility and ensure that investors are not overly exposed to any one sector or country.
3. Invest in a passive global equity index fund
Kroijer recommends investing in a passive global equity index fund as a simple and effective way to achieve diversification in world equities. A global equity index fund is designed to track a specific market index, such as the MSCI World Index, and offers low fees and expenses because it is passively managed.
This means that investors can capture the broadest possible market return of world equities without having to pay high fees or actively manage their portfolio.
Kroijer’s theory on investing in world/global equities is based on the belief that the best way to invest is to keep it simple.
Just one passive fund and you are done – add some safe bonds or cash too if you want. His philosophy is to invest for the long term.
Why Passive Global Equities?
Kroijer believes that investing in passive global equities is a smart move for a number of reasons:
Firstly, global equities represent a large and diverse market, encompassing companies from around the world. By investing in world equities, investors can access a broad range of industries and sectors, from technology to healthcare to energy.
Additionally, investments are not all stuck in one country and dependent on one single economy.
Secondly, investing in global equities offers potential for higher returns compared to other asset classes, such as bonds or cash. While there are always risks associated with investing, global equities have historically shown strong long-term growth potential.
Finally, Kroijer believes that investing in global/world equities is a hedge against inflation. Inflation is the rate at which the cost of goods and services increases over time. When inflation rises, the purchasing power of cash decreases, making it less valuable. By investing in world equities, investors can potentially passively grow their wealth and stay ahead of inflation.
Applying Kroijer’s Theory in Global Equities
Now that we understand Kroijer’s theory on investing in global equities, let’s explore how to apply it in practice. Here are four steps to get started with your research:
1. Determine your investment goals
The first step in investing is to determine your investment goals. What are you investing for? Are you investing for retirement, a down payment on a house, or a child’s education? Your investment goals will help determine your investment timeline and your risk tolerance. Be very clear in your own mind.
2. Choose your asset allocation
Once you have determined your investment goals, the next step is to choose your asset allocation. This refers to the mix of assets in your portfolio, such as stocks, bonds, and cash. Your asset allocation should be based on your investment goals, your risk tolerance, and your investment timeline.
Kroijer recommends a diversified portfolio of just two funds 1. A passive global equity index fund, and 2. Some cash and or safe government bonds.
3. Invest in a passive global equity index fund
The next step is to invest in a passive global equity index fund. There are many options available, such as the Vanguard Total World Stock Index Fund or the iShares MSCI ACWI ETF. When you research, look for a fund that tracks a broad global market index, has low fees and expenses, and is passively managed.
4. Rebalance your portfolio periodically
Finally, it’s important to periodically rebalance your portfolio. However, using Kroijer’s method of a single passive global index fund with some cash and government bonds, the lion’s share of rebalancing will be done automatically inside the global fund.
Elegant and simple indeed.
In Summary – Global Investing
Investing in global equities can look to be a daunting task, but Kroijer’s theory on investing offers a simple, elegant and effective approach that anyone can follow. By emphasizing the importance of diversification and low-cost passive global index funds, Kroijer’s theory can help investors achieve their investment goals while minimizing risk and fees. By determining your investment goals, choosing your asset allocation, investing in a global equity index fund, and periodically rebalancing your portfolio, you can achieve your investment goals with confidence and ease. With a sound investment strategy based on Kroijer’s theory, you can invest in world equities and achieve your financial goals over the long term.
Cheers
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